Sale of Domestic Letting property

Repay a company director's loan from proceeds of sale of a property.

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A domestic property letting company was lent an amount of money by the director to purchase property to let.  The company has recently sold one of it's properties and would like to use the profit from the sale to repay the loan amount to the director.  Is there any reason why this would not be allowed by HMRC.

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paddle steamer
By DJKL
16th Oct 2017 17:00

Depends if, when repaying loan to director, company is solvent and has met all its liabilities to its other creditors ; for instance does company need to consider CT it may owe to HMRC re any profit on the sale?

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Replying to DJKL:
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By carlp893
16th Oct 2017 17:28

Hi DJKL, the company is solvent and is intending to pay all it's other creditors off. They are then intending to reduce the balance the company owes the directors so that their profit for the year is zero - therefore there will be no CT. There will still be a credit balance owing to the directors to carry forward.

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By stephenkendrew
16th Oct 2017 17:33

But the repayment of the loan will not reduce the profit for the year!

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Replying to stephenkendrew:
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By carlp893
16th Oct 2017 22:15

Of course it wouldn't - rookie mistake, thank you.

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paddle steamer
By DJKL
16th Oct 2017 19:25

As mentioned above the use of profits after tax to repay loans has no direct bearing on the level of profits subject to tax.

Repaying a loan does not go into the income statement, it will be Dr Loan, Cr Bank, a transaction only impacting the constituent parts of the balance sheet.

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Replying to DJKL:
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By carlp893
16th Oct 2017 22:35

Of course, thank you.
The proceeds of the sale have been Dr bank 120k and Cr Property Disposals 120k. Then, as you stated, Cr bank and Dr Directors Loan 120k to pay off directors loan. Is there a tax implication on the 120k proceeds.

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Replying to carlp893:
paddle steamer
By DJKL
16th Oct 2017 22:58

You no doubt have the cost/valuation of the property in the previous accounts, you need to journal it out

Dr Revaluation reserve (if there is one)
Dr Gain/loss disposal (property disposal)
Cr Investment property

Above may play/post slightly differently if you are within FRS102, you possibly will need to also consider deferred tax if previously provided.

The tax on the Invest Prop sale (it is an investment property ?) will be proceeds (120k) less selling costs less original cost (if after March 82) less enhancement costs (if any) less indexation, that is presuming the property was an investment property.

Tax will then be calculated on company profits and company gains offset where possible by losses and non trade loan relationship debits.

You may want an accountant to deal with all this, especially if you have say losses and non trade loan relationship debits and credits.

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Replying to DJKL:
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By carlp893
17th Oct 2017 15:10

Thanks for your help, much appreciated.

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